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Fool's Gold: Why Bitcoin Must Go Up

An ultra-foolish value play.

Stocks are sometimes priced by sentiment, sometimes fundamentals, sometimes technicals, or a combination of the three. Commodities like gold, on the other hand, are priced by good, old-fashioned supply and demand. Where does Bitcoin fall? I would say it's somewhere in between.

If we look at Bitcoin as analogous to gold then we can calculate the price of a Bitcoin in terms of gold.

We will assume:

The price of gold is $1,231/oz (as of this writing)

10,000,000 of the 21,000,000 available Bitcoins have been mined (for simplicity)

174,100 metric tonnes have been mined to date

1,000 kg/metric tonne

2.20462 lbs/kg

16oz/lb

This means that if you want to know the price per Bitcoin in terms of the total global value of gold, simply do the math. $1,231/oz x 174,100 tonnes x 1000 kg/tonne x 2.20462 lbs/kg x 16oz/lb = $7,559,804,240,032 total value of all gold already mined.

$7,559,804,240,032/10,000,000 bitcoins already mined = $755,980.42 per Bitcoin. This also assumes the same demand for bitcoins as there is for gold, so we must take a discount, because bitcoins have no other use. Gold can be used in electronics, jewelry, and teeth. With a current price of $929 per bitcoin that is a pretty good value.

I would surmise that the price will keep going up as it becomes more and more acceptable to use in the open market. The benefits of a bitcoin vs a paper/coin currency are there is no machinery to make them (except the computer power to "mine" them), no input costs, no obsolescence, no redesign cost, and no counterfeiting. Bitcoins also have the advantage of being infinitely divisible. Gold can only be divisible into useful amounts, i.e., an amount that you can see and touch. It wouldn't be very practical to divide it into a single atom, although technically you could.

On the negativeRecently, China has banned financial companies from transacting in Bitcoin according to an article on Bloomberg. According to the head of China research at Bocom International Holdings Co., Hao Hong, the "concern is that it interferes with normal monetary policy operation" and, "It represents an unofficial leakage to the current monetary system and trades globally. It is difficult to regulate and could be used for money laundering. I think the central bank is right to make this move."

I have to fundamentally disagree with Hong's assessment. There is no fundamental difference between Bitcoin and other currencies in that it can be exchanged into another currency and used to buy goods. There is no difference whether you take dollars and exchange it into Yuan, or if you take dollars and exchange it into Bitcoin then exchange Bitcoin into Yuan. To Hong's second point, criminals are already experts in money laundering.

The Department of Homeland Security also took the position that the virtual currency could help facilitate criminal activity. The fact remains that those who wish to make illegal deals and sell illicit items will find a way. Whether it is U.S. dollars or Bitcoin, criminals will find a way to exploit the system. Bitcoin has the added benefit that the transactions are in fact logged publicly. There are methods of ascertaining the identity of a given user and tracking the trail of transactions. This is the importance of regulation and well thought-out international laws.

On the positiveBitcoin enjoyed a better reception by Ben Bernanke, who stated in a letter to a Senate panel that Bitcoin "may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system."

Bitcoin skeptics say, "Bitcoins can be stolen." I make the comparison to the Tesla fires. The percentage of thefts are not proportional to that of traditional currencies, just like the proportion of Tesla fires compared to traditional gas-fueled cars.

Bitcoin may be the first step in creating a global currency. There is a lot of money to be made in currency trading, but it doesn't create real value to the economy writ large. There is no good or service being rendered; it is purely arbitrage. If the world economy, as intertwined as it is, adopted a global currency, there would be fewer barriers to doing business overseas, no one country or monetary block would be the reserve currency, and companies wouldn't have to waste money protecting against foreign currency fluctuations. It won't be perfect at first, but nothing worth doing is easy.